Blame Game

Just read Robert Samuelson op-ed in the Washington Post “China’s Dollar Deception” (http://www.washingtonpost.com/wp-dyn/content/article/2009/04/05/AR2009040501724.html?hpid=opinionsbox1). Samuelson is reacting to China central bank Chairman Zhou Xiaochuan’s recent comments suggesting the world needs a new reserve currency. I certainly would not debate economics with Samuelson, but one theme bothers me. Samuelson writes:

“The Chinese denounce American profligacy after promoting it and profiting from it. Low prices for imported goods (shoes, computers, TVs) encouraged overconsumption. From 2000 to 2008, the U.S. trade deficit with China ballooned from $84 billion to $266 billion. China’s foreign exchange reserves are now an astounding $2 trillion.

It’s not just that exchange rates were (and are) misaligned. American economists have argued that a flood tide of Chinese money, earned from those bulging trade surpluses, depressed interest rates on U.S. Treasury securities and sent investors searching for higher yields elsewhere. That expanded the demand for riskier securities, including subprime mortgages, and pumped up the housing bubble. So China’s policies contributed to the original financial crisis, though they were not the only cause.”

Though Samuelson does recognize that China’s policies “were not the only cause” of the original financial crisis, he emphasizes its role. As I understand it that is that: China earned lots of US dollars from exports; invested them in US Treasuries which kept US interest rates low; and the low US interest rates “expanded demand for riskier securities, including subprime mortgages, and pumped up the housing bubble”. So, bankers gave no-down-payment mortgages to people who would clearly be in over their heads because of China? And the Masters of the Universe on Wall Street who developed credit default swaps and other instruments many of them did not understand, did so because of China? And Americans in general lived way beyond their means racking up huge amounts of debt, because of the China?

I understand that in pure economic terms the fact that China had lots of dollars and was willing to lend them to the US kept our interest rates low and therefore facilitated increased consumption in the US. But PLA troops were not holding guns to the heads of Americans to force them to accept years of weak regulation, record low family savings rates, over the top consumption, sleazy lending practices, and diabolically complex financial instruments. No, those phenomena all carry the Made in America label.

Whenever I hear an analysis similar to Samuelson’s I feel as if I’ve entered a meeting of alcoholics who blame their problems on the local liquor store because it sells booze cheap. To me, like the alcoholic, the first step is to recognize that we are the ones who have been out of control.

And by the way, if you want a thoughtful analysis of China’s involvement in the current financial crisis and Zhou’s recent comments, I suggest you check out the recent Paul Krugman piece in the NYT, “China’s Dollar Trap” (http://www.nytimes.com/2009/04/03/opinion/03krugman.html?scp=1&sq=krugman%20china&st=cse)

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